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Trade-induced economic growth boosts employment and wages

23/05/12 - Governments that foster open markets and resist protectionism have the best chance of stimulating inclusive economic growth and creating high-value jobs, according to a new study from 10 international organisations presented in Paris.

Policy Priorities for International Trade and Jobs, launched by OECD Secretary General Angel Gurria during the annual OECD Forum, shows that protectionist and discriminatory trade measures do not protect or preserve jobs. On the contrary, closing markets is actually more likely to stifle growth and put additional pressure on labour markets.

The report, a product of the International Collaborative Initiative on Trade and Employment (ICITE)*, analyses the complex interactions between globalisation, trade and labour markets. Drawing on numerous studies covering different parts of the globe and countries at very different levels of development, the report highlights the powerful role trade can play in driving growth and improving employment.

Of the 14 main studies undertaken since 2000 reviewed in the report, all 14 have concluded that trade plays an independent and positive role in raising incomes.

Through its impact on productivity, trade also raises average wages. Over the 1970-2000 period, manufacturing workers in open economies benefitted from pay rates that were between 3 and 9 times greater than those in closed economies, depending on the region. In Chile, workers in the most open sectors earned on average 25% more in 2008 than those in low-openness sectors.

Fears of the impact of offshoring may be exaggerated. Studies for the United Kingdom, United States, Germany and Italy demonstrate that off-shoring of intermediate goods has either no impact or, if any, a positive effect on both employment and wages.

The report also shows, however, that openness to trade is not enough. Complementary policies – such as sound macroeconomic policies, a positive investment climate, flexible labour markets and adequate social safety nets – are needed to realise the full benefits of trade.

“In today’s challenging policy environment of a hesitant recovery and slow job creation, market openness can be a critical element to boost growth and employment,” Mr Gurria said. “Trade liberalisation has historically gone hand in hand with better economic performance when accompanied by sound institutions and effective employment and education policies, in both developed and developing economies alike. Opening up further will benefit workers, firms and consumers.”

The ICITE report debunks the principal argument against freeing up trade – the supposed impact of imports on jobs. The report says that there is no systematic link between imports and unemployment. Instead, evidence shows that in country after country, both exports and imports push productivity growth upward while helping create better skilled and higher paying jobs.

Offshoring and outsourcing by developed countries – two commonly-cited negative aspects of globalisation – often complement, rather than replace domestic jobs, while creating new, higher-wage opportunities in developing countries, according to the report.

* ICITE is comprised of: the African Develoment Bank, Asian Development Bank, Economic Comission for Latin America and the Caribbean, IADB, the International Labour Organization, the Organization of American States, the Organisation for Economic Co-operation and Development, the United Nations Conference on Trade and Development, the World Bank and the World Trade Organization. The views expressed here do not necessarily reflect those of the ICITE partner organisations.